Does the tax exemption for Dutch startups actually benefit startups?

2016-12-21 | Lorenz van Gool

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Last month, the Dutch ‘House of Representatives’ approved a proposal to lower the taxes on exercising options for startup employees. But does this even benefit startups and their employees? We asked several experts in different fields.

The proposal, done by Aukje de Vries from political party VVD, will be implemented January 1, 2018.

StartupDelta reported: “In the first years after launching, startup employees often earn a lot less than their corporate peers. More often than not, startups therefore try to attract talent by paying employees in options or shares. With fast-growing startups, however, this can mean a steep increase in share-value and thus a high income tax. Without the option to cash in shares and on a low salary this can lead to cash flow issues for shareholding employees. The tax measure for exercising options while working for a startup is a first step towards solving the issue.”

And: “To clearly define to whom this tax exemption applies, eligibility has been narrowed down to startups that are registered under the Dutch WBSO-regulation, proving they are innovative and R&D-certified.”

On the surface, this makes sense.

Not much exemption

But when reading the whole plan (pdf), it isn’t as positive as the news sounds, explains Maurits Bos from tax attorney firm Benvalor.

“The tax exemption (25%) counts only for a sum up to 50.000 euro. So the maximum exemption is just 12.500 euro. When the 50.000 euro is exceeded, there will be no exemption at all. The bill also is only for shares that are exercised after 12 months and within 5 years after being issued.”

“So, this proposal doesn’t do much when there’s an exit after six years, and even with a decent early exit it doesn’t do much. According to me it’s just a palliative.” (In The Netherlands we would say ‘een doekje voor het bloeden’)

‘Just for show’

A Dutch investor, who wishes to stay anonymous, told us he thinks this bill is just for show, as exercising shares isn’t common in The Netherlands. “You could say that’s the case because of how we are fiscally treated. But I would like to counter that and say: a 25% discount won’t change that at all.” He added: “STAKs and ESOPs are more common, and I never heard someone complain about them.”

He stresses that one of the problems of exercising options is that it isn’t tax deductible for companies, while they at the same time cause dilution and lower the value for share holders.

“Also, I’m not a fan of the WBSO system. Clinging this proposal to it means that subsidy advisors/consultants have even more power.”

For scale-ups, he thinks this bill might be relevant though. “But considering everything else: it’s just for show. Politicians should do more useful things.”

More complicated

Our co-founder Sieuwert van Otterloo is more nuanced, but also critical: “My opinion is mixed. On the one hand, it’s nice that the effects on startups are taken into account when creating policy. On the other hand, the actual benefits for real startups will be small.”

“First of all, WBSO is an additional bureaucratic overhead that many medium sized older companies can handle (by hiring advisors) but startups will skip. WBSO requires planning ahead. So it’s more suited for older businesses and less for truly innovative lean startups.”

“Secondly, this proposal seems to add more options to an already complicated decisions. Companies can offer employees bonuses, certificates, shares or Earnings Rights and find it hard to evaluate all these options. Employees will find it even harder.”

“It should also be stressed that this proposal is not about founders of startups, but about early employees of scale-ups. This is stated correctly in the press release but this nuance is easily lost in discussion. The founders and earliest contributors are often working as freelancers (ZZP) for tax purposes. Only when the company becomes a scale-up, it makes sense to hire people as employees and this ruling wil become helpful.”

“If this law functions as a signal that The Netherlands is open to innovative companies, it could work. We applaud the effort and hope it will put the Netherlands on the shortlist of best startup locations. As a practical measure, it is a nice but small gesture with little impact on the actual tax revenue and wealth distribution of the Netherlands.”

Summary

TL;DR:
This proposal doesn’t do much for startups and their employees, but rather makes complicated stuff more complicated. Scale-ups and their employees however could benefit from it. It seems like the VVD wanted a nice story for the show, and put the label ‘startup’ on something ‘scale-up’.

Lorenz is co-editor-in-chief of StartupJuncture. As a freelance editor and journalist, he writes about startups, innovation and (e)-business. Loves to report from conferences. Really likes cleantech and journalism startups. You can ask him anything about dinosaurs. Twitter: @lorenzroman